DRIVERS OF ENTREPRENEURSHIP: LINKING WITH … Rasool Ahmed Gulzar and Shaheen Naseer.pdfGrowth...

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DRIVERS OF ENTREPRENEURSHIP: LINKING WITH ECONOMIC

GROWTH AND EMPLOYMENT GENERATION (A Panel Data Analysis)

Farhat Rasool

Ahmed Gulzar

Shaheen Naseer

Abstract

The need for entrepreneurship for economic development has always been crucial in the history of

successful nations and developed economies because entrepreneurs are the leaders who invent

innovative ideas that give spark to economic activities. Entrepreneurship is a key determinant of

sustainable growth in modern times. Mostly jobs are produced by small businesses started by

entrepreneurial mind persons, many of them set up large companies. Entrepreneurship is frequently

expressed in terms of higher self esteem, to exercise creative freedoms, and an overall greater sense

of control over their own lives. Many economists and educators believe that these types of

experienced entrepreneurs foster the robust entrepreneurial culture that exploit personal and

communal economic and social success at sub-national, national, and international level. A strand of

literature explains different categories of entrepreneurship, which are of paramount importance in

explaining the economic growth, employment and population. The task of this study is to identify

those factors along with the role of education, Research and Development activities which

significantly explain the entrepreneurial potential and skills and at the second stage, to examine the

impact of those entrepreneurial skills on economic growth and employment. To complete the task,

micro panel data approach with different economic models and econometric estimation techniques

(i.e. Stepwise Least Square with Forward Selection method and Pooled Least Square without random

and fixed effects) is used. The panel data includes the observations on eight upper middle and lower

middle income countries over the period ranging from 2005 to 2011.

JEL Classifications: D31, E23, E24, J21, J28, J31, L26, M13, O10, O11, O 17 O30, O34,

Keywords: Drivers of Entrepreneurship, Economic Growth, Employment Generation, Institutions, government

stability

Phd fellow at Pakistan Institute of Development Economics, Islamabad.

[Email: [email protected]]

Research Officer in National Transport Research Officer (NTRC), Ministry of Communications and Research Scholar at

Pakistan Institute of Development Economics (PIDE), Islamabad

[Email: [email protected]]

Research Scholar at Pakistan Institute of Development Economics (PIDE), Islamabad.

[Email: [email protected] ]

Author Note: The views in this paper are those of the author(s) and not those of the institutions, they attached with. Authors are

responsible for any error and emission. Finally feedback/comments are strongly welcomed.

Acknowledgments: Authors would like to thank Dr.Musleh Ud Din (Joint Director PIDE) and Dr. Ejaz Ghani on their kind

support and various policy group discussions especially on relationship among entrepreneurship, economic growth and

employment generation.

mailto:[email protected]



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1. INTRODUCTION

The need for entrepreneurs for economic development has always been crucial in the in history

because they are the leaders who invent innovative ideas that give spark to economic activities.

They are responsible for the combination of factors of production by capital formation, creating

employment opportunities, wealth distribution that facilitates development and growth. A well

explained definition of entrepreneurship in the words of Wennekers and Thurik (1999) that

successfully makes the functional roles of entrepreneurs is:

"…the manifest ability and willingness of individuals, on their own, in teams within and outside

existing organizations, to perceive and create new economic opportunities (new products, new

production methods, new organizational schemes and new product-market combinations) and to

introduce their ideas in the market, in the face of uncertainty and other obstacles, by making

decisions on location, form and the use of resources and institutions." (46–47)

High and sustained economic growth is the fundamental objective of every developed or

developing country’s governmental policy. Economic growth is a long term expansion of the

productive potential of the economy. It generates employment in the economy and raises the

living standards of the nation. Economic growth promotes business activities in private sector,

increases company profits and enhances investor confidence..

Growth process, in general, of the country is profoundly influenced by entrepreneurial activities

at different levels. Entrepreneurship is a key determinant of sustainable growth in modern time.

Mostly jobs are produced by small businesses started by entrepreneurial mind persons, many of

them set up large companies. Entrepreneurship is frequently expressed in terms of higher self

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esteem, to exercise creative freedoms, and an overall greater sense of control over their own

lives. Many economists and educators believe that these types of experienced entrepreneurs

foster the robust entrepreneurial culture that exploit personal and communal economic and social

success at sub-national, national, and international level.

Education starting from elementary school to degree programs and learning activities develop

the Standards for supporting Performance Indicators in students. More the challenging

educational activities and experiences; more will be the discoveries, innovations ideas that

enable individuals to develop the insight needed to discover and create entrepreneurial

opportunities. These results in high expertise to start and manage own businesses to take

advantage of these opportunities. The need for entrepreneurship for sustainable growth becomes

more important for Asia as this region is the home of sixty percent of the world population with

rich natural resources. Almost in all Asian economies entrepreneurial opportunities are low

because of narrow industrial zones, limited export sector (except China), weak private sector and

limited internal markets. So to promote the entrepreneurial education, trainings and seminars is

crucial for Asia.

Entrepreneurial education can certainly impact an apprentice at all levels in a variety of manners.

But there are some other factors like govt. stability, patent rights, institutions, research

&development socio economic conditions, investment profile and consumption factors that can

influenced the growth process.

In current years policy makers have publicized increasing interest in the role of Entrepreneurship

to promote economic growth and development. This has been stimulated by the rapid growth of

the business sector in Asian Economies such as China, Brazil and India. As shown in the figure

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below, there are structural, economic, institutional and geographical factors which generate and

promote entrepreneurship at its different stages: Necessity Based Entrepreneurship, Improvement

Driven Entrepreneurship and Growth Led Entrepreneurship. Further, it explains the way those

factors affect economic growth and employment generation indirectly through promoting

entrepreneurship or directly.

The task of this study is to identify those factors along with the role of education, Research and

Development activities which significantly explain the entrepreneurial potential and skills and at

the second stage, to examine the impact of those entrepreneurial skills on economic growth and

employment. To complete the task, micro panel data approach with different economic models

and econometric estimation techniques (i.e. Stepwise Least Square with Forward Selection

method and Pooled Least Square without random and fixed effects) is used. The panel data

includes the observations on eight upper middle and lower middle income countries over the

period ranging from 2005 to 2011.

The organization of the paper is as follows; section 2 deals with the relevant review of literature,

section 3 explains the methodological setup, section 4 explains data type and estimation

technique, section 5 deals with the results and interpretations, section 6 includes conclusion and

policy recommendations.

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Structural Factors Structural Factors Structural Factors

Entrepreneurship

Necessity Driven Entrepreneurship

Improvement Driven Entrepreneurship

Growth Oriented Entrepreneurship

Factors include

educational levels

and systems, Socio-

economic

conditions, Govt.

stability etc.

Income Level Employment Generation Population Growth

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2. REVIEW OF RELEVANT LITERATURE

Richard Cantillion (1955) introduces the term entrepreneur first time in the pages of economic

literature. According to Van de Klundert and Smulders, (1992) entrepreneurship is a “creative

destruction”. The different historical arguments of an economist give an expanded perspective on

the term “Entrepreneurship” as it is a fundamental agent in most production, distribution and

Growth theories. A lot of studies have been done about connection between entrepreneurship and

economic growth. The new classical economist focused that steady state equilibrium is only

possible under the umbrella of strong entrepreneurship for they are the innovator and the founder

of economics of innovation. Now question is that what are the forces and basic circumstances

that imprint strong entrepreneurship.

Solow & Swan (1970) believed that these are the labor and capital which contribute in the

process of economic expansion. Technological change remaines as exogenous (Manna from

Heaven). The basic idea in endogenous growth theory was that these are the endogenous

variables that effect productivity growth through entrepreneurship. The new classical axioms of

perfect competition are strongly restricted incentive for innovative opportunities. The models of

general equilibrium do not talk about dynamics of entrepreneurship. In Romer’s (1990) version

research sector is tank engine of growth by assuming increasing returns to scale as it provides the

monopolist the justification of monopolistic competition. The blue prints of new Varity of capital

goods that are produced and used in goods producing sector (Chamberlin 1933). Lucas, (1978)

explored the fact that Education increases managerial abilities and thus the propensity to become

an entrepreneur to handle with complex business environment.

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Throughout intellectual history, the entrepreneur has worn many faces and fulfilled many roles.

A lot of distinct roles for the entrepreneur have been identified in the economic literature (Hébert

1982).

Shultz (1980) thought quantity and quality both need to be addressed for economic growth that

are controlled through the abilities of entrepreneurs. Therefore it is the entrepreneur who is

responsible for restoring equilibrium of economic growth. But endogenous growth theory is

silent on the underlying conditions needed for entrepreneurship and innovation.

Peretto (1999) found that growth is driven by the process of technological advance and

knowledge accumulation brought about by R&D efforts brought by owners of the firms.

Baumol (1990) has mentioned several forms of entrepreneurship. He further explains that

entrepreneur is an individual who is creative enough to add his own wealth and prestige. But

overall environment is tremendous importance in determination of innovative entrepreneurial

process.

Different dimension of entrepreneurship has been studied by economists: Lucas is of the opinion

that entrepreneurial attitude is the deterministic element between the worker and employer.

Calvo and Wellisz (1980) extended the Lucas’ paper and examined the role of individual

capability, age, and knowledge on entrepreneurial allocation. Gordon (1998) analyzed the impact

of fiscal policy especially govt. stability, socio-economic conditions, tax burden and incentives

in the U.S. economy. Kihlstrom and Laffont (1979) study risk aversion and Van Praag and

Cramer (2001) extend it to include individual abilities, subsidies and investment strategy to the

engine of entrepreneurial activity.

Eakin et al. (1994) and Quadrini (2000) have mentioned the financial constraints on

entrepreneurship especially liquidity and savings.

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Blanchflower (2000) found that self-employment is high for those at the tail of the education

distribution. Individuals with the least education have the highest probability of being self-

employed which also confirm the views of Le (1999).

Acs et al. (2005) using country-level data for the years 1981-1998 has empirically examined

through fixed effect and a simultaneous model. They have introduced variables such as

investment in research and development, self employment rate and level of entrepreneurship.

They concluded that countries with higher degree of education entrepreneurial activity and

training are on higher steady state.

Audretsch and Keilbach (2005) introduced the concept of entrepreneurship capital, referring to

society’s capacity to create entrepreneurial activity specifically to generate new firms. Their

study measured the impact of entrepreneurship on regional labor productivity and on the regional

growth of labor productivity and employment generation in Germany. Entrepreneurship capital

was measured using the number of startup enterprises relative to the region’s population. In

additions they involve R&D as well as greater financial risks. The results revealed that

entrepreneurship capital significantly affect a region’s labor productivity. However, the growth

of labor productivity significant effects only for R&D based industries.

Van Stel and Suddle (2005) inspect the relationship between new firm configuration and change

in regional employment for the Netherlands. They have measured the time and sector wise the

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degree of urbanization. The results showed the employment growth as the dependent variable

regressed against the startup rate, wage growth, and population density. To check asymmetry

data was divided into two time periods and that confirmed the impact of new firm’s growth to

employment growth has been stable and was the same in both periods.

Camp (2005) had examined the efficiency of entrepreneurial regions and least entrepreneurial

regions in the U.S. and reported that the former had 109 percent higher productivity, 125 percent

higher employment growth and 58 percent higher wage growth as compared to the later. This

study also chains the view that entrepreneurship is the link between innovation and regional

economic growth that ultimately is road map to economic development. The results exposed

significant coefficients for entrepreneurship activity, and high levels of expected variation in

growth

Henderson (2006) studied the effect of entrepreneurship activity and economic growth for urban

and rural areas. The empirical results imply that entrepreneurial activity is positively affecting

employment growth. Considering the analysis between metropolitan and non-metropolitan areas,

the study found that employment growth was stronger in urban areas rather than in rural areas.

However, there is no significant difference on the relationship between high growth business

startups and employment growth between urban and rural areas.

Vijverberg (2008) provides a meta-analysis of empirical studies into the impact of formal

schooling on entrepreneurship selection and performance in developed countries. Five main

conclusions result from this meta-analysis. First, the impact of education on selection into

entrepreneurship is insignificant. Second, the effect of education on performance is positive and

significant. Third, the return to a marginal year of schooling is 6.1% for an entrepreneur. Fourth,

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the effect of education on earnings is smaller for entrepreneurs than for employees in Europe, but

larger in the USA. Fifth, the returns to schooling in entrepreneurship are higher in the USA than

in Europe, higher for females than for males, and lower for non-whites or immigrants. The

conclusion provides a number of policy implications to move the research frontier in this area of

inquiry. The entrepreneurship literature on education can benefit from the technical

sophistication used to estimate the returns to schooling for labor force.

Skogstrøm 2011 presents a theory on the relationship between educational choice and

entrepreneurship in a labor market with asymmetric information. The model shows that, in a

labor market where education is used as a signaling device, an imperfect relationship between

productivity in education and in the labor market can lead to an equilibrium where a fraction of

the high-ability individuals choose to quit school and become entrepreneurs. Le (1999) divided

the impact of educational choice for entrepreneurship through signaling channel in the labor

market. He found that people having low levels of education with high ability have higher

opportunities of entrepreneurship and self employment. Berglann et al. (2011) has also

confirmed this fact that entrepreneurship rates were higher among individuals with low levels of

education than among individuals with higher levels of education.

3. METHODOLOGICAL SETUP

A strand of literature explains different categories of entrepreneurship, which are of paramount

importance in explaining the economic growth, employment and population. The first task is to

identify those factors along with the role of education, Research and Development activities

which significantly explain the entrepreneurial potential and skills and at the second stage, to

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examine the impact of those entrepreneurial skills on economic growth and employment. Eliss &

William (2011) explain different types of entrepreneurship. The categories of entrepreneurship

in quantifiable terms are as follows;

nnnn EEEE 321 ,,

Where

En = Total Entrepreneurial Activity

E1n = Necessity Driven Entrepreneurship Activity

E2n = Improvement Driven Opportunity Entrepreneurial Activity

E3n = Growth Expectations of Entrepreneurial Activity

At first stage, we select those factors which explain all types of entrepreneurial activities and

skills to make the analysis more policy oriented. The functional forms made below are consistent

with the Eliss and William (2011). Our contribution is that we incorporated other economic and

structural factors and redefined these variables.

nnnn EEEE 321 ,,

),,&,,,,,,,,( TOInvDERGSSEmSEInsPRPGpggfEn (1)

),,&,,,,,,,,(1 TOInvDERGSSEmSEInsPRPGpggfE n (2)



Where;

PR= Socio-economic conditions and

Ins. =Institutions

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SE = Secondary Education

Em = Employment rate

GS = Govt. Consumption Expenditures

R&DE = Research and Development Expenditure

Inv = Investment Profile

TO = Government Stability

PG= Population Growth

g = GDP Growth

pg = Per capita Growth

The equation represents the general functional form of production function that exhibit constant

elasticity of substitution equal unity everywhere and is linear homogeneous. The statistical forms

of equations are as follows for estimation.

nnnn

nnnnnnnnnn

TOInvDER

GSSEmSEInsPRPGpggE

&

,,,

(5)

nnnn

nnnnnnnnnn

TOInvDER

GSSEmSEInsPRPGpggE

1111

1111111111

&

,,,

(6)

nnnnn

nnnnnnnnn

TOInvDERGS

SEmSEInsPRPGpggE

22222

222222222

&

,,,

(7)

nnnnn

nnnnnnnnn

TOInvDERGS

SEmSEInsPRPGpggE

33333

333333333

&

,,,

(8)

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The model used for estimation at the second stage by incorporating explained and unexplained

factors of different types of entrepreneurial activities (i.e ESSEn E1n E2n E3n, RSSEn, E1n, E2n, E3n )

along with other factors which explain the changes in employment, per capita income and

population while maintaining an economic relationship among population (P), employment (E),

and income (I). The basic idea of incorporating ESS and RSS of entrepreneurial activities as

independent variables is to separate the institutional, structural and economic impact of

entrepreneurial activities from their geographical, traditional and regional specific impact on

dependent variables. The model is near consistent with Deller et al. (2001), Nzaku and Bukenya

(2005), and Deller (2007), Mojica, et’ al (2009).The general form of the three-equation model is:

)/*,*,(* *PIEfP (9)

)/*,*,(* *EIPgE (10)

)/*,*,(* *IEPhI (11)

Where

P*, E*and I* represent the equilibrium levels of population, employment, and per capita income,

respectively, and P* E*

I* are a set of variables describing initial conditions, explained and

unexplained variations of different types entrepreneurial activity (ESSEn E1n E2n E3n, RSSEn, E1n, E2n,

E3n) for example GDP Growth, socio economic conditions, government stability, R & D

expenditures, secondary education, investment profile, per capita growth, employment and

population and other variables that are traditionally linked to economic growth, employment and

population. A simple linear relationship as quoted Mojica-Howell et al (2012) has been coined

here. This framework explains the relationship of variables in the equilibrium setup such as.

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P

IPPPP IEP *** 210 (12)

E

IEEEE IPE *** 210 (13)

I

IEIII EPI *** 210 (14)

Mills and Price, (1984) and Mojica Hoval (2009) narrated that by incorporating the initial

conditions, the variables of the equilibrium framework (population, employment and income)

will adjust accordingly. The considerations are incorporated as distributed lag adjustments and

are expressed as;

)*( 11 tPtt PPPP (15)

)*( 11 tEtt EEEE (16)

)*( 11 tItt IIII (17)

Population, Employment and Per capita Income depend on initial conditions and (Pt-1, Et-1, and It-

1) respectively and speed of change (γP, γE, and γI) coefficients. The larger the values the faster

growth rate is claimed. As suggested by Mojica, et’ al (2009), current employment, population

and income levels are functions of their initial conditions and the change between the

equilibrium values and initial conditions at their respective values of speed of adjustment (γ).

Substituting equations15, 16, and 17 into equations12, 13 and 14 and rearranging the terms gives

the model to be estimated and expressed as:

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P

IPPPtPtPtPpit IbEbIbEbPbP*

541312110 (16)

E

IEEEtEtEtEEit IbPbIbEbPbE*

541312110 (17)

I

EPIItItItIIit PbEbIbEbPbI*

541312110 (18)

The regional changes in population, employment and per capita income by ΔP, ΔE, ΔI

respectively. To investigate the relationship between entrepreneurship and economic growth,

entrepreneurship and employment, entrepreneurship and population, the set of equations is

treated as individual linear equations where changes in population, employment, and per capita

income are regressed individually against explained and unexplained variations of different types

entrepreneurial activity (ESSEn E1n E2n E3n, RSSEn, E1n, E2n, E3n) and other factors including socio

economic conditions, government stability, R & D expenditures, secondary education,

investment profile, per capita growth, employment and population influencing change in per

capita income, change in employment and change in population. These linear equations are as

follows:

P

P

IPPP *

0 (19)

E

E

IEEE * (20)

I

I

IIII *

0 (21)

Where

IbEbIbEbPb PPtPtPtPP 54131211 (22)

IbPbIbEbPb EEtEtEtEE 54131211 (23)

PbEbIbEbPb IItItItII 54131211 (24)

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4. DATA TYPE AND ESTIMATION TECHNIQUE

The variables used in this study are explained in annexure. We used the panel data for eight

Asian Countries for the period of 2005-2011. The sample economies have been segregated into

upper middle income ($1,006 to $3,975) and lower middle income ($1,005 or below it) grouped

by World Bank gross national income (GNI) 20111 calculated by World Bank Atlas Method.

Upper Middle income economies include China, Thailand, Turkey and Malaysia. And the lower

middle income economies include India, Indonesia, Pakistan and Philippine.

The variables used in the study have been collected by different sources such as different types

of entrepreneurial activities (Necessity Driven, Opportunity/Improvement Driven and Growth

Oriented), GDP growth, per capita income, population Growth, R&D Secondary Education,

Employment rate, Govt. Consumption Expenditures, Research and Development Expenditure

have been taken from World Development Indicators (WDI) 2012 whereas Investment Profile

and Government Stability have been taken from International Country Risk Guide (ICRG).

Global Entrepreneurship Monitor, GEM has captured three types of entrepreneurial activities/self

employment in the market such as necessity driven, opportunity and growth oriented. These are

the entrepreneurs of small, medium and large level enterprises. The necessity driven

entrepreneurs are not by choice but by necessity based due to lack of wage employment. The

opportunity driven self-employment is by choice, in order to make use of some perceived market

opportunity.

1 http://data.worldbank.org/about/country-classifications

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We have employed the panel step-wise least square forward selection method for the estimation

of equations 5, 6, 7 and 8 and employed pooled least square method to estimate the equations 19,

20 and 21.

5. RESULTS AND DISCUSSION

As shown in table1, Population growth, government stability and R&D expenditures explain

significantly the variation in total entrepreneurial activity while the impact of socio-economic

conditions, govt. consumption expenditures, secondary education and investment profile come

out to be insignificant. The impact factor of government stability is the highest. The economic

rationale of it is that the government stability ensures the secured opportunities for investment

and to start new ventures where the R&D expenditures play its role in garnish the potential

faculty of entrepreneurship. Population growth is an important determinant of the demand side of

the economy. Capital rush to the country where demand and ultimately market for the product is

available. Government stability has significant and encouraging effect on institutional quality

that ultimately give boost to entrepreneurial activities Qureshiet al, (2010) and Khan and Saqib

(2011) Adnan et.al(2011) where government stability means government is not in crises and

there are less cabinet changes. Furthermore Govt expenditures have externalities that enter as a

direct input in production function. If Govt is giving importance to more productivity enhancing

expenditures it will give boost to entrepreneurial activities. (Stephen J. Turnovsky 2004).

As shown in table2, the variables like population growth, government stability, R&D

expenditures, government consumption expenditures, secondary education and investment

profile explain significantly the variation in Necessity Driven Entrepreneurship. The point to be

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noted here that along with other variables, the government consumption expenditures drive

Necessity Based Entrepreneurship through meso type economic policies. While at secondary

level education, most of the students involve starting their own business or involve themselves in

family business at small scale. This gives the generation and spreading of household business,

cottage industries and small scale enterprises- the glaring feature of upper middle and lower

middle income economies.

As shown in table3, the variables like population growth, government stability, socio-eco

conditions, govt. consumption expenditures and secondary education explain significantly the

variation in Improvement Driven Entrepreneurship while the impact factors of government

stability, govt. consumption expenditures and secondary education are the highest respectively.

This phenomenon explain that if these three crucial factors remain playing their role then it

changes the necessity based entrepreneurship into improvement driven entrepreneurship which is

more sustainable and plays important role in long run economic growth and stability. As shown

in table4, the variables like socio-economic conditions and govt. stability still play their

significant role to transform improvement entrepreneurship into growth oriented and

employment led entrepreneurship.

As shown in table5, the variables like explained entrepreneurial activity, R&D expenditures,

socio-economic conditions explain significantly the variation in change in per capita income,

where the impact factor of R &D is the highest. The results explain that R&D activities affect

economic growth both by building up entrepreneurial potentials and skills and by having direct

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impact by increasing the value added of economic activities on large scale (i.e. large scale

industries, firms etc.)

As shown in table 6, explained necessity based entrepreneurship along with R&D expenditures

and socio-economic conditions explain variation in change in per capita income. The impact of

improvement driven and growth oriented entrepreneurship activities have insignificant impact on

change in per capita income. It explains the fact that the major economic activities in upper

middle and lower middle income countries are based on necessity based entrepreneurship

activities and skills, with the first objective of wining the bread for survival.

As shown in table 7, the variables like explained entrepreneurship, and population growth affect

change in employment, where the impact factor of the earlier independent variable is

significantly high. While other variables like secondary education, R&D expenditures, govt.

stability, per capita growth have indirect impact on change in employment through explained

entrepreneurship activities.

As shown in table 8, the variable unexplained growth entrepreneurship significantly explains the

variation in change in employment; while the other variables like necessity based and

improvement driven entrepreneurship activities have insignificant impact on change in

employment.

As shown in table9, the variables like explained entrepreneurial activity and govt. stability have

significant impact on change in population, while in table 10, it is shown that only explained

necessity based entrepreneurship have significant impact on change in population. This fact is

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also backed by the general phenomenon in lower middle income and occasionally in upper

middle income countries that in low paid or low earned families, the number of children is high

than average.

6. CONCLUSION AND POLICY RECOMMENDATIONS:

On the basis of analysis made in this study, the drivers of entrepreneurship in descending order

in terms of their importance are shown in table 11. As shown in the table, Government stability

plays crucial role at all stages of entrepreneurial activity: total, need based, improvement led and

growth oriented: Any country should take measures to ensure government stability because this

factor builds up the confidence among the general public about the continuity of policies

especially relating to small scale or large scale economic (business) activities. These policies

include investment policy, tax policy, and the policy of establishment of industrial cities etc.

Govt. consumption expenditures turn out to be the second important driver of entrepreneurial

activities. This factor again plays a key role at all stages of entrepreneurial activities. The

government should initiate such policies which increases govt. consumption expenditures. These

policies include meso economic policies, youth entrepreneurship program initiated recently in

Pakistan, Loan scheme with small amounts to encourage household business, cottage industries

and small scale industries. The impact of government consumption expenditure increases, if it is

used through micro-finance schemes.

In upper middle and lower middle income countries, the R&D expenditures help in searching

new avenues of establishing new businesses with small amount in shortest span of time and help

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in generating employment level. Secondary education helps both in generating need based

entrepreneurial activities and then still plays pivotal role in transforming need based

entrepreneurial activities into improvement led activities. Socio-economic conditions help to

generate in improvement led entrepreneurial activities and then to transform them into growth

oriented entrepreneurial activities.

Taking from the aspects of generating and continuing of entrepreneurial activities, to generate

need based entrepreneurial activities and then to transform those into improvement led activities,

the drivers include government stability, government consumption expenditures and secondary

education and investment profile. To generate improvement led activities and then to transform

them into growth oriented entrepreneurial activities, the drivers include government stability,

government consumption secondary education and socio-economic activities. While to generate

and continue growth led entrepreneurial activities, the drivers include government stability,

government expenditures and socio-economic activities.

Table 11:

Sr

# Drivers

Entrepreneurial Activity

Total

Need

Based

Improvement

Led

Growth

Oriented

1 Govt. Stability

2

Govt. Consumption

Exp.

3 R&D Expenditures

4 Secondary Education

5

Socio-economic

condition

6 Investment Profile

Further, it is found in this study that the variables like explained entrepreneurial activity,

explained necessity based entrepreneurial activates, R&D expenditures, socio-economic

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conditions explain significantly the variation in change in per capita income, where the impact

factor of R &D is the highest. The results explain that R&D activities affect economic growth

both by building up entrepreneurial potentials and skills and by having direct impact by

increasing the value added of economic activities on large scale (i.e. large scale industries, firms

etc.). The impact of improvement driven and growth oriented entrepreneurship activities have

insignificant impact on change in per capita income. It explains the fact that the major economic

activities in upper middle and lower middle income countries are based on necessity based

entrepreneurship activities and skills, with the first objective of wining the bread for survival.

It is also found that the variables like explained entrepreneurship, and population growth affect

change in employment, where the impact factor of the earlier independent variable is

significantly high. While other variables like secondary education, R&D expenditures, govt.

stability, per capita growth have indirect impact on change in employment through explained

entrepreneurship activities. The unexplained growth entrepreneurship significantly explains the

variation in change in employment; while the other variables like necessity based and

improvement driven entrepreneurship activities have insignificant impact on change in

employment.

Further investigation deduced that the variables like explained entrepreneurial activity, necessity

based entrepreneurial activities and govt. stability have significant impact on change in

population. This fact is also backed by the general phenomenon in lower middle income and

occasionally in upper middle income countries that in low paid or low earned families, the

number of children is high than average.

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Appendix

Variables Definitions

1. Entrepreneurship

We develop a list of possible support to entrepreneurship initiatives and variation that

address the particular constraints to entrepreneurship based on literature review. This list

is intended to be illustrative of the types of interventions that can be used to address

context specific constraints, rather than being an exhaustive collection of all types of

possible entrepreneurship support initiatives and adaptations.

Recognizing the importance of entrepreneurship initiatives that have been adapted to the

specific needs of the (potential) entrepreneurs, we further disaggregate by entrepreneurial

profile focusing on three types of entrepreneurs based on their enthusiasm for entering

into entrepreneurial activity.

Necessity driven entrepreneurs: entrepreneurs who have few or no other income

generation or employment opportunities, and thus become entrepreneurs to sustain their

livelihood by necessity rather than choice;

Opportunity driven entrepreneurs: entrepreneurs who pursue a perceived market

opportunity and choose to start their own business, despite having the option of

generating an income through employment elsewhere at the time of starting a business.

Growth oriented entrepreneurs: entrepreneurs who have a relatively higher job

creation potential (which may also be an indication of greater international market reach

and/or a higher degree of innovation in products and services offered).

Total early-stage Entrepreneurial Activity rates

Percentage of 18-64 population who are either a nascent entrepreneur or owner-manager of a

new business

1. GDP growth (annual %)

The Annual percentage growth rate of GDP at market prices is based on constant local

currency. Aggregates are based on constant 2000 U.S. dollars.

2. Secondary education, pupils

Secondary education pupils are the total number of pupils enrolled at secondary level in

public and private schools.

3. Secondary education, general pupils

Secondary general pupils are the number of secondary students enrolled in general

education programs, including teacher training

4. Self-employed, total (% of total employed)

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Patent applications are worldwide patent applications filed through the Patent

Cooperation Treaty procedure or with a national patent office for exclusive rights for an

invention--a product or process that provides a new way of doing something or offers a

new technical solution to a problem. A patent provides protection for the invention to the

owner of the patent for a limited period, generally 20 years.

5. Expense (% of GDP)

Expense is cash payments for operating activities of the government in providing goods

and services. It includes compensation of employees (such as wages and salaries), interest

and subsidies, grants, social benefits, and other expenses such as rent and dividends.

6. Research and development expenditure (% of GDP)

Expenditures for research and development are current and capital expenditures (both

public and private) on creative work undertaken systematically to increase knowledge,

including knowledge of humanity, culture, and society, and the use of knowledge for new

applications. R&D covers basic research, applied research, and experimental

development.

7. Population growth (annual %)

Annual population growth rate for year t is the exponential rate of growth of midyear

population from year t-1 to t, expressed as a percentage. Population is based on the de

facto definition of population, which counts all residents regardless of legal status or

citizenship--except for refugees not permanently settled in the country of asylum, which

are generally considered part of the population of the country of origin.

8. Government Stability

A measure of the government's ability to stay in office and carry out its declared

program(s), depending upon such factors as the type of governance, cohesion of the

government and governing parties, approach of an election, and command of the

legislature.

9. Socio economic Conditions

An estimate of the general public's satisfaction or dissatisfaction with the government's

economic policies, covering a broad spectrum of factors ranging from infant mortality

and medical provision to housing and interest rates. Different weights are applied in

different societies, depending upon the relative political impact.

10. Investment Profile

A measure of the government's attitude toward inward investment as determined by four

components: the risk to operations, taxation, repatriation, and labor costs.

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Table1: Dependent Variable: Total Entrepreneurial Activity

Variable Coefficient Std. Error t-Statistic Prob.*

Constant 57.071 13.199 4.324 0.000

Population Growth 1.605 0.707 2.270 0.000

Government Stability 10.652 2.387 4.462 0.006

R & D exp. (% of GDP) 1.255 0.315 3.988 0.005

Socio-eco conditions 1.000 0.000 1.989 0.119

Govt. Consumption exp. 0.956 0.718 1.331 0.250

Secondary edu. Pupil 0.842 0.969 0.869 0.634

Investment Profile 0.225 0.330 0.683 0.742

R-squared 0.514087 Mean dependent var 8.557

Adjusted R-squared 0.4385 S.D. dependent var 5.740

Table2: Dependent Variable: Necessity Driven Entrepreneurship Activity


Constant 30.316 7.827 3.873 0.000



R & D exp. (% of GDP) 1.813 0.608 2.981 0.005







Table3:Dependent Variable: Improvement Driven Entrepreneurship Activity


Constant 108.123 18.061 5.987 0.000



R & D exp. (% of GDP) 1.611 1.394 1.156 0.254







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Table4: Dependent Variable: Growth Oriented Entrepreneurship Activity


Govt. consumption 0.855 0.200 4.277 0.000


Govt. stability 1.006 0.540 1.862 0.068

R & exp (% of GDP) 0.893 0.793 1.125 0.266

GDP growth 2.478 1.541 1.608 0.114



Table 5: Dependent Variable: Change in Per Capita income

Variable Coefficient Std. Error t-Statistic Prob.

Constant 6893.919 11433.95 0.602934 0.55

Explained Entreprenurial Activity Rate 91.19462 46.13344 1.976758 0.055

Unexplained Entreprenurial Activity Rate -37.8073 74.76522 -0.50568 0.6159

Secondary education pupil 1.16E-05 8.11E-06 1.426223 0.1616

R & D exp. 1389.393 302.3845 4.594789 0

Socio-economic conditions 813.9676 301.0349 2.703897 0.01

population growth 112.0886 766.1413 0.146303 0.8844

Employment rate -85.9998 100.1598 -0.85863 0.3957

Government stability -316.667 243.3225 -1.30143 0.2006


R-squared 0.385882 Mean dependent var -144.834


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Table 6: Dependent Variable: Change in Per Capita Income


Constant 7191.83 11285.07 0.637287 0.5276

Explained Necessity Based Entre. 127.2231 59.02128 2.155547 0.0372

Unexplained Necessity Based Entre -89.6379 159.7353 -0.56117 0.5778


R & D exp. 1447.226 315.5883 4.585806 0

Socio-economic conditions 817.8054 299.0224 2.734931 0.0093

population growth 229.186 804.7749 0.284783 0.7773

Employment rate -89.0467 97.76737 -0.9108 0.3679

Government stability -274.453 236.3555 -1.16119 0.2524




Table 7:Dependent Variable: Change in Employment


Constant -7.24038 2.646284 -2.73605 0.0089

Explained Entre. Activity 0.114165 0.055037 2.074348 0.0438

Unxplained Entre. Activity 0.118377 0.09468 1.250286 0.2177

Secondary education, pupil 8.97E-09 1.15E-08 0.777134 0.4411

R & D exp. 0.013378 0.362329 0.036922 0.9707

Govt. Stability 0.342108 0.306915 1.114667 0.2709


Per capita growth 0.015095 0.134503 0.11223 0.9111



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Table8: Dependent Variable: Change in Employment


Constant -7.52558 3.371695 -2.23199 0.0304

Explained Growth Entre. 0.049292 0.103707 0.475306 0.6368

Unexplained Growth Entre. 0.189776 0.108965 1.741619 0.0881

Secondary education, pupil 1.70E-08 1.15E-08 1.480515 0.1454

R & D exp. -0.18713 0.353052 -0.53004 0.5986

Govt. Stability 0.421205 0.319056 1.32016 0.1932


Per capita growth -0.04365 0.113066 -0.38607 0.7012



Table9: Dependent Variable: Change in Population


Constant 5.80E-13 8.85E-14 6.551954 0

Explained Entre. Activity 7.93E-16 4.16E-16 1.905551 0.0633

unexplained Entre. Activity 3.45E-16 6.89E-16 0.501154 0.6188


R & D exp. -6.47E-16 2.64E-15 -0.24457 0.8079

Govt. Stability 3.92E-15 2.27E-15 1.728271 0.091

Per capita growth -1.10E-15 9.90E-16 -1.10638 0.2746

Employment rate 5.73E-15 8.69E-16 6.600376 0



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Table 10: Dependent Variable: Change in Pouplation


Constatnt 2.99E-13 4.55E-14 6.576773 0

Explained Necessity Entre. 4.96E-16 2.87E-16 1.725536 0.0914

Unexplained Necessity Entre 5.65E-16 7.20E-16 0.784072 0.4372


R & D exp. 7.12E-16 1.44E-15 0.494135 0.6237

Govt. Stability 2.98E-15 1.20E-15 2.489074 0.0167

Per capita growth -5.46E-16 4.98E-16 -1.09585 0.2791

Employment rate 2.87E-15 4.46E-16 6.44645 0



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